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The Threat of OTT for the Pay-TV Market

The television industry is relatively new and therefore, naturally open to innovation and highly influenced by technology and the consequent improvements in the quality of delivery or consumption.

High entry barriers, strong monopolies or oligopolies and big multimedia conglomerates in control of as many stages as possible of the value chain have also characterized this industry. It is in this context that the disruption of OTT services shook the traditional business models of legacy media and forced them to face more tech-oriented new players, capable of satisfying more or less the same needs and wishes in apparently more efficient ways.

With the recent global expansion of the famous video service, Netflix, the question of whether Netflix will succeed in making its new host countries a profitable home or not has been raised worldwide. The service arrived in Spain amid great anticipation and uncertainty. Its pay-TV operators and traditional broadcasters had been experimenting with video-on-demand (VOD) streaming services and struggling with revenue models in an audiovisual market undergoing constant restructuring and with a low pay-TV penetration [MED 15a].

Looking at it either from the side of the national broadcasters and its developing competitors, or from the side of the new entrant, the current situation is very interesting to look into: how are the national industries working so far and how much space is there for the American giant to take in the ecosystem, if any? How will Netflix deploy its forces in the new territory and what strategies will it follow in order to conquer the new markets, if it can?

In this chapter, we aim for a better understanding of what it means for a national industry to face the entry of this new international competitor with such and innovative and successful profiles in terms of shaping consumption culture, while looking at the competitive landscape in which content creators, aggregators and distributors operate.

2.1. The "new" barriers to entry and value chain

Over-The-Top (OTT) services deliver content over the Internet, "over the top" of traditional infrastructures, set-top boxes and traditional cable or satellite pay-TV. They allow users to sidestep incumbent pay-TV operators, with their high fees and limited bundles, for a connected and on-demand television experience. Broadband connectivity provides instant access to a global network of services and applications, "enabling equipment manufacturers, application providers and customers to bypass the services offered by traditional network operators and to cross national boundaries, thus obtaining multiple new routes to market" [GOD 15, p. 11]. OTT services could substitute, to some degree, traditional media and telecom services, so pay-TV providers fear for the loss of their lucrative business, while online services experiment and sometimes succeed in discovering revenue models. The panorama of OTT SVOD (subscription-based video on demand), AVOD (ad-supported) and TVOD (transactional) services is growing.

According to Porter's theory of the five forces, the threat of new entrants shapes the competitive structure of an industry. The threat of new entrants refers to the threat new competitors pose to existing competitors in an industry. "New entrants to an industry bring new capacity and a desire to gain market share that puts pressure in prices, costs and the rate of investment necessary to compete" [POR 08].

Several factors determine the degree of the threat of new entrants to an industry. Many of these factors fall into the category of barriers to entry. These are factors or conditions in the competitive environment of an industry that make it difficult for new businesses to begin operating in that market. The high fixed cost and almost zero marginal cost of the audiovisual industry have served as a traditional entry barrier in the industry. These costs are not only related to the production of content but also to the infrastructures that make broadcasting, cable and satellite television work, making legal and technical requirements another important barrier.

Given the flexibility and universality of the Internet as a means of distribution, as well as the absence of major geographical and legal barriers, audiovisual products distributed through the Internet are ideal to develop economies of scale and windowing strategies in a more efficient way than ever before [HER 03]. With the digital economy, traditional entry barriers in the audiovisual industry have been mostly diffused to the extent than even final users are able to produce and distribute audiovisual content. Therefore, it seems like new entrants may find different entry barriers.

These changes place content itself in the center of the television business. Content, along with the viewing experience of the consumer, becomes more important in shaping of the strategy. There is a daily battle between traditional content companies, distributors and technology companies for control of the viewing experience. The viewing experience itself has also changed: with the definition of television having changed so much that it is not limited to the device anymore, companies that provide services for a viewing experience have been forced to face as competitor players who were not their natural rivals.

We could easily assert that real entry barriers have to do with the ability to offer relevant content and reach the audience in the most convenient way to them. "The Internet tends to dampen the bargaining power of channels by providing companies with new, more direct avenues to customers" [POR 01, p. 66]. In a world of limitless choice, where almost anyone can acquire, create and distribute interesting content, the winner will be the one that can utilize data to respond to audience demands most nimbly and drive an experience that feels personalized.

Mapping the structure of the television industry has become confusing and not as straightforward as before. In this context, there is also the threat that new entrants become substitutes in the audiovisual industry, and some prominent providers disappear. According to Ala-Fossi and Lax [ALA 16, p. 1], "a number of recent reports suggest the life expectancy of broadcasting as a free-to-air television platform may be no more than 15 years".

The concept of the value chain popularized by Porter has helped us view the processes that make up the system behind the audiovisual entertainment market and the activities that need to be carried out to create competitive advantage. Nowadays, and with the influx of the digital economy, an important topic in media economics regards the transformation of this value chain. Times, players and windows for creation and supply of contents are changing; shorter times require faster adaptation to novelties, more experimentation and higher concentration in legacy media competing with a flexible smaller player.

The "sidestepping" that comes with OTT services in the audiovisual world could be described somehow with a comparison to Uber disrupting the supply chain of taxis: large taxi companies that manage their fleet of taxi drivers are sidestepped when another player allows a seeming direct contact between the drivers and the customers. Intermediation still exists, as the app does the work of connecting drivers and users, but to the user, everything is more direct, faster and more efficient.

The perspective of the users is very important. Companies tend to forget that their customers do not see the intricacies of the value chain or the supply chain when they make their purchases. Viewers tend to be unaware of the processes and activities that led to the content they are accessing, and who manages logistics, operations, infrastructure or marketing. They relate to the point of access to content and the quality provided by that immediate service, a quality that corresponds with what they have paid and, therefore, with that value delivered in the chain. That is why it is necessary to define services in terms of how they are viewed by consumers rather than according to the technological or managerial elements involved. Viewers want content, and the easiest and cheapest way to access it will go a long way in the market.

An example of this redefinition of the value chain in the audiovisual world can be seen in the case of Spotify. The digitization of music ruptured the music value chain: an industry that was used in strong margins did not react fast enough to digitization and its culture of gratuity and piracy. Amid the crisis, Apple's iTunes opened a window for those who would still want to pay for music outside of the limitations of albums and physical copies. With Spotify, the rules of the music industry changed further. A technology-driven business model replaced traditional intermediaries while answering to an idea of "access" over "ownership". Spotify exploits the fact that a large number of people nowadays do not want to pay for specific music products to own them in the form of a physical library; many prefer to subscribe or gain access to a "database" they can navigate, control and share. Any streaming model these days follows this desire for control and vastness that characterizes modern consumers.

Real disintermediation does not happen, but, with the new intermediaries, distribution costs are lower and the chances of smaller creators reaching end users increase. Something similar can be seen in the case of the famous YouTubers - users turned content...